Bank of Canada cuts projections after rate hike

The Bank of Canada cut its growth forecasts for each quarter of 2010, warning global economic uncertainty and cooling domestic consumption will dampen the recovery.

Noting that the global economic recovery was proceeding but is not yet self-sustaining, the central bank cut its second-quarter annualized growth forecast to 3 percent from 3.8 percent in estimates released on Thursday.

It also cut the third-quarter forecast to 2.8 percent from 3.5 percent and the fourth quarter to 3.2 percent from 3.5 percent.

The accelerated global fiscal consolidation and the weaker and more uncertain global outlook imply a slightly more pronounced deceleration in economic growth in Canada than previously expected, the central bank said in its quarterly Monetary Policy Report.

Consumer spending has moderated, while housing investment has also slowed, as expected, but the handoff to business investment has been more subdued than forecast, the bank said.

The forecast on Thursday is a more detailed look at the central bank's thinking after it had warned earlier this week of slower growth, suggesting a more gradual pace of rate hikes.

The Bank of Canada raised interest rates by 25 basis points on Tuesday for a second straight month, bringing the key target for the overnight rate to 0.75 percent.

The bank said some risks, such as European debt concerns, remain elevated, but momentum from emerging market economies could be stronger than currently thought.

The effects on Canada of Europe's sovereign debt crisis have been modest so far and felt mainly through lower commodity prices, the bank said. It sees the debt crisis shaving 0.1 of a percentage point off growth this year and 0.3 percent of a point next year.

The central bank maintained its quarterly forecasts for core inflation through 2010 and said the rate of price increases is expected to stay near 2 percent through 2012, helped by a slowdown in the growth of labor costs. Its forecasts for overall price increases were lower than in April due to a decline in its projections for energy costs.

The bank judges that the risks to the inflation outlook remain elevated and are roughly balanced over the projection horizon, it said.

The central bank also lowered its assumption for the Canadian dollar to 96 U.S. cents from 99 U.S. cents, and said this would help boost exports more than it had forecast last quarter.

In recent weeks, the currency has been trading largely between 93 U.S. cents and 97 U.S. cents, and has eased on fears of a of double-dip recession in the United States and uneven global recovery. (Reporting by Louise Egan and Ka Yan Ng; Editing by Jeffrey Hodgson)